Costco (COST 0.29%) kicked off its fiscal year with some very solid results. The warehouse club saw net sales jump 13.3% to $31.12 billion in Q1 2018, up from $27.47 billion during the first quarter of last year.
In addition, the retailer reported that comparable-store sales rose 10.3% in the United States and 10.5% globally. These increases, which were fueled in part by a big jump in digital sales, saw earnings per share (EPS) climb to $1.45, up from $1.24 in Q1 2017. A piece of that, $0.09 per share, came from a one-time benefit from a change in accounting, but last year's results also had a one-time benefit of $0.07 from a non-recurring legal settlement.
Costco had a strong quarter. Image source: Getty Images.
Digital changes are working
Over the past couple of years Costco has made major changes to its website. These include simply improving how everything works and making it easier to order, as well as its recent addition of same-day home delivery via Instacart.
These changes have paid off. In Q1 2018 e-commerce comparable-store sales rose by 42.1%. That number is stunning, but it's not quite as good as it seems, according to CFO Richard Galanti's comments during the Q1 earnings call.
"This number includes the holiday shift of Thanksgiving, but it's a little different than in-store because of Cyber Monday and we estimate that somewhere north of 5% and perhaps up to 10% of benefit," he said. "So that 42 would come down a little bit if you'd normalized it."
Even if you assume that 10% of the growth came from the calendar shift between quarters, a 32% year-over-year gain is impressive. What's perhaps even better for the chain is that its digital initiatives -- specifically delivery -- are still relatively new.
Renewal rates were strong
While rising sales are a good sign, Costco makes about 75% of its profits from selling memberships. Because of that, renewal rates are the best gauge of the company's health.
Our membership renewal rates came in at 90% in the U.S. and Canada and 87.2% worldwide," Galanti said. "These are the same renewal percentage figures we had at the end of the previous fiscal quarter at Q4 of '17."
That's a very strong number because the warehouse club raised its prices in June for the first time in about five years. That did not seem to have any negative impact, as total households with memberships rose from 49.4 million at the end of Q4 to 49.9 million at the close of Q1. The company also saw total cardholders rise from 90.3 million to 91.5 million over the same period.
Expansion will continue
Costco has taken a slow and steady approach to adding new locations, and that will continue in fiscal 2018. The chain expects to open between 20 and 25 new warehouses, with half in the U.S. It also plans to add three in Canada, two in Korea, and one each in Australia and Mexico. In addition, the company will relocate six warehouses, four in the U.S. and two in Canada.
Costco is a retail success story
Every time Amazon or Wal-Mart has taken steps to enhance its digital business, predictions have been made that this will be the change that finally makes Costco vulnerable. It's fair to say that the warehouse club has proven resilient, and its long-term results show that it's not going to be dominated by any other player in the retail space.
Costco isn't a fast mover, but it has very loyal customers. That gives the chain the ability to step back, see how the market develops, and respond. It has done that with its digital business, and there's no reason to expect that it won't be able to continue doing the same going forward.
